Japan stocks can be the haven in a bleak world

Global equity investors have reason to be concerned: The economic outlook is worsening, interest rates are rising and tensions in the US-China relationship could further harm growth. But all is not bleak. Japan provides a measure of certainty and promise, with a stable government, expanding economy, improving return on equity and booming tourism.
Japanese stocks aren’t reflecting these positive factors. The Topix entered a bear market in 2018, dropping more than 22 percent from its January peak to a two-year low. The index closed out its worst December performance in 59 years on Friday. Year to date, international investors have sold more than $48 billion of shares.
Yet the country remains on track to record the longest period of economic growth, at 74 consecutive months, in the post-war era, according to a report in the Nikkei that cited the government’s monthly economic report.
Granted, risks to the outlook are increasing. Bank of Japan Governor Haruhiko Kuroda has noted, in particular, dim prospects for overseas economic development and diminishing demand for Japanese exports. Meanwhile, an increase in the sales tax to 10 percent from 8 percent scheduled to take effect in October 2019 will weigh on domestic consumption. Still, Kuroda has promised to keep close watch and respond if needed by cutting interest rates, boosting asset buying and accelerating the pace of money printing.
The political environment is supportive. Prime Minister Shinzo Abe won the ruling party leadership election in September, empowering him to implement pro-growth structural reforms with little opposition. The so-called “Third Arrow” of his Abenomics program is designed to promote expansion of Japan’s economic output by improving workforce diversity, adjusting corporate taxation, and reforming heavily protected industries such as agriculture and healthcare.
Many Japanese companies have reported record profits in recent quarters. Return on equity for the MSCI Japan Index has doubled to 9.8 percent from 4.4 percent in 2012, according to a report by Morgan Stanley.
Other areas of Japan’s economy continue to show improvement, such as tourism. Fifteen years ago, the total number of foreign visitors to Japan was roughly 5 million. In 2018, the country welcomed 30 million tourists, and with an anticipated 40 million planning to visit in 2020 ahead of the Olympics.
Those who choose to invest in Japan in 2019 should focus on companies exposed to domestic consumption. Those adverse to individual stock-picking can consider acquiring broad exposure to the Topix.
In sum, Japan is ready for thoughtful increased international investing, though keep an eye on political and economic factors.

— Bloomberg